stock ticker: SCOK

It is no surprise that Citron Research is not a big fan of Rodman & Renshaw. A few years back Citron had an epic battle with Rodman when  they placed a stong buy recommendation on a company called Home Solutions of America (NASDAQ:HSOA) that Citron called a complete fraud.

Flash forward a few years later and Home Solutions is now delisted –  yes, trading at 0.0006,  Its officers were indicted for accounting fraud, exactly as Citron reported. . 

http://www.sec.gov/litigation/litreleases/2009/lr21314.htm

Here You Go

Now they’re back with a new girl — an ugly duckling Chinese coal deal with an utterly improbably rise and ridiculously unsustainable run-up on the premise that $6 PIPE investors (plus warrants at $12) with a six-month lockup have a bought “great deal”.  It’s like a horse race with a donkey where the donkey is started with a one-lap lead.

Citron finds it inconceivable that Rodman isn’t required to do a little more due diligence on these things, and suggests that readers do what Rodman doesn’t:  follow the money. 
“SinoCoking’s President, Chief Executive Officer and Chairman, Mr. Jianhua Lv, does not hold any shares of Top Favour, however, Mr. Lv has the right to potentially acquire up to 51% of Top Favour. On July 6, 2009, Mr. Jianhua Lv transferred his shares of Top Favour to Honour Express Limited, a British Virgin Islands international business company which is solely owned by Mr. Shaohua Tan, a Singapore citizen. As a result of the share issuance and share transfer, Top Favour (BVI) has 10,000 ordinary shares outstanding, 51% of which is held by Honour Express Limited.”

Meet the Puppetmaster

Mr. Shaohua Tan appears to be a penny stock jockey with filings in GHII, JGBO. and LTUS.  He operates BVI holding companies out of Singapore with names like “Top Favour” and “Honour Express”. 

Looking at filings to try to gain a sense of his track record, we find:

JGBO : a thinly traded  Chinese pharma covered only by Brean Murray and Dutton (paid-for coverage),
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=jgbo&sid=0&o_symb=jgbo&freq=2&time=13

LTUS is a $1 Chinese pharma company,
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ghii&sid=0&o_symb=ghii&freq=2&time=12

and GHII is a .12c OTCBB Chinese design-build company

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=LTUS&sid=0&o_symb=LTUS&freq=2&time=13&x=0&y=0

Then there’s BOPH, purportedly a Chinese pharmaceutical, “quote unavailable”…

Tan was appointed Director and “Leader” of Genesis Technology Group (OTCBB:GTEC)  in 2005 which was rolled into JGBO (NOTE: It is NOT the current NASDAQ:GTEC.)

http://findarticles.com/p/articles/mi_pwwi/is_200502/ai_n9778301/

Despite years of wild promises of future wealth from international deals, Citron notes that the most tangible outcome of all this furious burst of business is ….. a lawsuit.

Further, Mr. Tan is reportedly the operator of Genesis Equity Partners, LLP which was organized, according to announcements filed by a plaintiff attorney,

” In 2006, Genesis Technology Group, Inc. (GTEC), China West, LLC and Joshua Tan, a director of Genesis, formed GENESIS EQUITY PARTNERS LLC (GEP), a Florida limited liability company, for the purpose of completing private-to- public reverse merger programs for Chinese companies. GTEC owned 51%, China West owned 25% and Tan owned 24% of GEP.”

He’s now the subject of at least $13 million in arbitration claims for failing to close and deliver on equity transactions, and for diluting its partners by 500% share issuance.

The plaintiff?  Capital Research Group which operates stock tout-for-free-shares site TheSubway.com !!!  Yes the ones who were charged for fraud by the SEC

http://www.sec.gov/litigation/litreleases/lr18286.htm
http://findarticles.com/p/articles/mi_pwwi/is_200809/ai_n28121655/
http://www.prnewswire.com/news-releases/china-west-llc–china-west-ii-llc-arbitrations-against-genesis-pharmaceuticals-now-total-135-million-65438452.html

You Own What?

What is undisclosed is the real terms by which Mr. Tan and Mr. Lv acquired their interest in these Chinese coking plants, which is only disclosed to be in the form of “contracts” stated above. 
From recent filings, we see :

The following excerpts taken from filings describe the twisted relationships that give rise to the ownership in these Chinese assets.

“Top Favour’s relationships with Hongli Group and its owners are governed by a series of contractual arrangements, through which Top Favour holds and exercises ownership and management rights over the Hongli Group.  Neither Top Favour nor Hongyuan owns any direct equity interest in Hongli Group.  According to a legal opinion issued by PRC counsel to SinoCoking, the contractual arrangements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC.”

“Pursuant to the operating agreement, Hongyuan provides guidance and instructions on each Hongli Group company’s daily operations, financial management and employment issues.  In addition, Hongyuan agrees to guarantee the performance of each Hongli Group company under any agreements or arrangements relating to its business arrangements with any third party.  In return, the owners of Hongli Group must designate Hongyuan’s candidates as their representatives on each Hongli Group company’s board of directors, and Hongyuan has the right to appoint senior executives of each Hongli Group company.  Additionally, each Hongli Group company agrees to pledge its accounts receivable and all of its assets to Hongyuan. ”

“Under the equity pledge agreement, the owners of Hongli Group pledged all of their equity interests in Hongli Group to Hongyuan to guarantee each Hongli Group company’s performance of its obligations under the consulting services agreement.  If a Hongli Group company or the owners breach their respective contractual obligations, Hongyuan, as pledgee, will be entitled to certain rights, including, but not limited to, the right to vote with, control and sell the pledged equity interests.  The owners of Hongli Group also agreed that upon occurrence of any event of default, Hongyuan shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the owners to carry out the security provisions of the equity pledge agreement, and take any action and execute any instrument as required by Hongyuan to accomplish the purposes of the agreement.  The owners of Hongli Group agreed not to dispose of the pledged equity interests or take any actions that would prejudice Hongyuan’s interest.  This agreement will expire two years from the fulfillment of Hongli Group’s obligations under the consulting services agreement.”

http://www.sec.gov/Archives/edgar/data/1099290/000141188609000049/defin14a.htm

To which Citron observes, if (and when) something goes wrong, and investors seek legal recourse with regard to the actual profitmaking hard assets  … GOOD LUCK!

The Old Shell Game

And of course, our favorite:

“SinoCoking’s management decided that it was in SinoCoking’s best interest to become a publicly traded company in the U.S. to better position the company to raise capital from outside sources. ”

This disclosure, made with a straight face, in the wake of record financing amounts flowing like rivers out of Chinese banks the last year or two to support every conceivable venture needing capital … but somehow accessing the US capital markets by reverse merger “better positions the company to raise capital from outside sources.” 

Conclusion

Sharesleuth.com correctly points out that investors should heed a red flag when any company, especially one in a heavily commoditized industry, and extra-especially if its Chinese based, projects gross margins that are out of line with all its competitors.

Add to that an incomprehensible shell ownership structure, threaded through privacy and tax havens, and you’ve got a recipe for a predictable outcome.

Cautious investing to all.

stock ticker: SA

“Look around the table.  If you don’t see a sucker, get up, because you’re the sucker” – Amarillo Slim

Dreams of Gold vs Reality of Share Prices

Seabridge’s explicitly advertised and promoted investment premise is that it is a “call option” on the future price of gold.  Citron believes this premise is utterly false.
Aside from all the background noise about stock promotions, Seabridge investors invest in the stock because they hope it will rise in value as the price of gold rises.  As the company has told them, it is a levered play on gold.

But the price of Seabridge stock is not tied to the price of gold, it is tied only to the supply and demand for Seabridge shares.  That places shareholder returns squarely dependent not upon the price of gold, but upon the actions of management and insiders.  This is precisely why the past activities of Seabridge’s insiders are so troubling.  However, the proof is in the pricing. (more…)

stock ticker: SA

There are now hundreds of junior gold mining companies throughout the world, doing extensive drilling. It is really getting challenging to look at every project.  Best practices for investors are to stick to companies that have partnerships, earn-ins and drilling agreements with major mining companies.

However, there aren’t many with zero gold reserves and a billion dollar market cap.

And then there’s Seabridge Gold. (AMEX:SA) (more…)

stock ticker: GRMN

Can Garmin navigate their way out of the dead end they’ve driven into ?

Today marks the day that Nokia is shipping their first navigation based phone in to the US
http://hothardware.com/News/Nokias-5800-Navigation-Edition-And-E72-Smartphones-Ship-To-America/

Some have already called this new unit the “PND-Killer”
http://www.twice.com/article/439546-Nokia_PND_Phone_Offers_Free_Services.php
This announcement prompts us to look deeper into the future of navigation leader Garmin.  While we’re reluctant to join a pinata party here, the company’s own comments at Wednesday’s Barclay’s investors’ conference as delivered by its CFO are particularly important for any investor, long or short, looking to establish an opinion on where management is “driving”. (more…)

stock ticker: SEED

Be Careful with your SEED Capital

One of the great movie thoughts in history comes from the classic Night Shift, when an offbeat Michael Keaton suggests: “Wait a minute! Why don’t they just mix the mayonnaise with the tuna in the can… HOLD THE PHONE ! Why don’t they just FEED the tuna fish mayonnaise?!
A good idea, but hardly groundbreaking. Citron recalls the classic “peanut-butter-and-jelly in the same jar” story of Nitromed (NASDAQ:NTMD) which claimed a breakthrough drug that was made up of two available generic drugs. Needless to say, despite the advice of numerous analysts, it was an utter disaster for stockholders.

Introducing Origin Agritech, (NASDAQ:SEED) (more…)

stock ticker: AMED

Citron first reported on Amedisys over a year ago.  Never before have we received as much correspondence from former employees as we did after this story.  Last month, the market witnessed the abrupt resignations of two key executives from Amedisys.  In this post, Citron will shed some light on the “story behind the story” of Amedisys — a story that neither management nor its analysts want to talk about.

Amedisys business is providing home health care visits – nurses, hospice workers and therapists – on an outpatient basis.  An overwhelming amount of Amedisys’s revenues, in fact 87%, is paid directly by  Medicare reimbursement.  Under the best of circumstances, this concentration of business would be a significant risk factor.  However, for Amedisys, which operates with some of the highest gross and net margins in the business, red flags specific to the company are much more ominous. (more…)

stock ticker: LPHI

Citron has to give credit where credit is due — CEO Brian Pardo has truly been a visionary in the life settlements industry.   Although he has had more than his share of critics, he has spent the past decade avoiding regulation while returning significant returns to LPHI stockholders.

All good things must come to an end, however, and now the final chapter is being written for Life Partners.  The SEC and Wall St. have decided to move in on life settlement industry and it is Citron’s opinion that this sea change will be at the expense of Life Partners Holdings. Until now the life settlement industry has been a financial product marred with controversy, but the new task force and the effects of commoditization are going to change the landscape – dramatically and permanently. (more…)

stock ticker: WRLD

In May, Citron research introduced readers to the curious case of World Acceptance Corp.  (NASADAQ:WRLD) a sub-prime lender doing business in approximately 900 locations mostly located in the South.  Citron has been quiet as of late because 1.  markets have turned indiscriminately positive 2. We were waiting to assess the prospects for regulation of sub-prime lenders.

Neither a bank nor a payday lender, World has built its entire business on loopholes – and therefore its operating region is limited to just 11 states where its been able to curry the favor of state legislatures to open the loopholes in state usury laws so it can make sub-sub-sub-prime loans at super-high rates.  Any form of federal law, which has never existed, would supercede the many loopholes enabling WRLD to operate in their niche states. (more…)

stock ticker: CBEY

Cbeyond (NASDAQ:CBEY) Relevant Highlights:

Shares Outstanding	28.7 m
Recent Market Cap	410.8 m
Trailing P/E	154
Forward P/E	102
Ttm Earnings Per Share	.13
Current Cash Burn Rate	$9m - $10m per year

Background

Three weeks ago, Citron introduced readers to Cbeyond (NASDAQ:CBEY), a sales company offering bundled telecommunications services specializing in small business customers.  Citron’s inquiry focused on indicators of stalling growth and failure to gain traction in new markets to match the company’s results in its flagship city markets earlier in the decade. (more…)

stock ticker: VPRT

What are you going to do if 44% of your net income disappears?

For the past few years, Vistaprint has been a controversial name amongst investors.  On one hand you have a printing servicing company that provides printed products to small business at an affordable price.   But on the other hand, you have a company with a dirty secret which derives a large portion of its income from “referral fees” – from companies that offer web loyalty shopping clubs, or in layman terms, those $14.95 a month charges on your credit card bill that leave you scratching your head.

The word “referral” sounds innocent enough, but in real terms, as a consumer, when you complete an online purchase, you are shown a button saying something like “Save $10 on your Next Purchase from this Company”.  Beware!  If you click, even accidentally, your full contact info, but worse, your credit card information, is sent on without your permission to a 3rd party company you haven’t given your permission to.  From that point, the debate rages about how many of these charges represent trickery, and how many more are simply fabricated without the consumer’s consent or knowledge. (more…)